After the Celebration

After the celebration, both of the poorly constructed lines had to be rebuilt,
and sometimes relocated. It took the Union Pacific five years to finish this task.
As Dodge said one week before the historic meeting: "I never saw so much needless
waste in building railroads. Our own construction department has been
inefficient[41]".

After the construction was completed, many were astonished at the costs of
construction. The UP and CP, even with 44,000,000 acres of free land, and over
$61,000,000 in cash loans, were almost bankrupt. Two factors played a role in
keeping expenses high. First, after the Civil War the costs of building anything
were exceptionally high. There was a shortage of capital and labor, and even
without the rough winters and Indian attacks it was expensive to feed thousands of
workmen who were sometimes miles away from any sizable town. Second, the officers
of the Central and Union Pacific founded their own supply companies and bought
construction materials from these companies. The UP, for example, needed coal, so
six of its officers created the Wyoming Coal and Mining Company. They mined coal
for $2.00 per ton (later reduced to $1.10) and sold it to the UP for as high as
$6.00 a ton. More significantly, the Credit Mobilier, which was also run by UP
officials, supplied iron and other materials to the UP at excessive prices. What
they did not make running the railroad, they earned selling to the railroad.

Many people pointed accusing fingers at the UP with its Credit Mobilier and
its wasteful building. But the government subsidies dictated the building strategy
and had a profound impact on the outcome. The leaders of the UP were greedy and
showed poor judgment, but the presence of free land and cash tempted them to hurry
west, then made them dependent on federal aid to survive. No wonder the UP officials
went out of their way to gain the favor of politicians. In this arrangement politicians
were more precious than freight or passengers.
The Credit Mobilier scandal came out just four years after the celebration at Promontory
Point and turned many voters against the UP. Others were annoyed because the UP was so
inefficient that it could not pay back any of its borrowed money. Just as the UP was
born with federal aid, it would have to grow up on federal supervision and regulation.

In 1874, Congress passed the Thurman Law, which forced the UP to pay 25 percent
of its net earnings each year into a fund to pay off its federal debt. Because the
line was so badly constructed, it competed poorly and needed the fund money to stay
alive. Building branch lines to attract rural traffic would have helped the UP, but
the government often would not give permission. Congress further destroyed any trace
of independence by passing a law, which created a Bureau of Railroad Accounts to
investigate the UP books regularly. A later president of the UP discovered that the
power to subsidize was the power to destroy.

Jay Gould took control of the UP in 1874. His solution was to use and create
monopoly advantages to raise prices, increase profits, and cancel debts. For example,
he paid the Pacific Mail Steamship Company to keep it from competing with the UP
along the West Coast. Then he raised rates 40 to 100 percent and, a few weeks later
raised them another 20 to 33 percent. This allowed him to pay off some debts and even
declare a rare stock dividend; but it soon caused more consumer anger. This brought on
more government regulation and eventually helped lead to the
Interstate Commerce Commission, which declared rate
discrimination as illegal.

The UP struggled for survival in the 1870's and 1880's, only to collapse into
bankruptcy in 1893. It is hard to imagine how its history could have taken any
other turn, given the presence of government aid. The aid led to inefficiency;
the inefficiency led to consumer anger; the consumer anger led to government
regulation; and the regulation left the UP no other options and gradually led
to bankruptcy.

The Central Pacific fared better, but only because its circumstances were
different. Its leaders - Stanford, Huntington, Crocker, and Hopkins
(the "Big Four") - shared common goals and cooperated well to achieve them.
These men focused mainly on one state, California, and used their wealth and
political force to dominate (and sometimes bribe) California legislators.
Stanford, who was elected Governor and U.S. Senator, was in charge of politics
for the Big Four. He prevented any competing railroad from entering California.
Profits from the resulting monopoly rates were added to unexpected good fortunes
from their Contract and Finance Company, which was the CP's counterpart of the UP's
Credit Mobilier. Unlike the UP leaders in the Credit Mobilier scandal, the Big Four
dodged jail because the records of the Contract and Finance Company "accidentally"
were destroyed. It was almost 1900 before privately financed railroads could raise
the financial and political strength to take on the established CP (later renamed
the Southern Pacific) in California politics.